New York Markets After Hours

How Sandy might help fix politics, boost dollar

Commentary: Fiscal cliff, infrastructure spending get another look

By

MichaelCasey

Columnist

All of a sudden, the word “recovery” means something different.

For a while at least, certain policymakers both inside and outside Washington will focus more on helping the storm-ravaged Northeast recover from this week’s disaster than on the broader economy’s drawn-out recovery from the 2008 financial crisis.

The good news is their efforts toward the first goal could help overcome their failure with the second. Once we’re through a painful next two months, 2013 should see some positive economic and political developments emerge from this tragedy — regardless of who wins Tuesday’s election. For currency investors, that should mean the dollar is headed higher.

For four years, many economists have been calling for a massive infrastructure upgrade as an effective form of federal stimulus. Not only would it immediately create jobs, but the improvement in America’s outdated roads, rail networks, ports and airports would boost economic productivity for the long term.

Reuters

Sandy in the Rockaways neighborhood of the Queens borough of New York, November 4, 2012. Victims struggled against the cold early Sunday amid fuel shortages and power outages even as officials fretted about getting voters displaced by the storm to polling stations for Tuesday’s presidential election.

Sadly, there has been no political will to write a check, not amid a public outcry over Washington’s ballooning deficits. The result? Other than a poorly managed stimulus bill in 2009, government has been a drag on recovery, not a support. Barack Obama’s presidency coincides with a net loss of 634,000 state and local government jobs, according to Bureau of Labor Statistics data out Friday. The federal government added just 14,000 positions over that time. So much for this being a period of rampant “big government,” as Mr. Obama’s critics describe it.

Well, now lawmakers and government leaders have an excuse to say yes to spending. With millions of people suddenly in need of aid, and with the election soon to be out of the way, ideology and partisan politics will pose less of an obstacle. Republican New Jersey Gov. Chris Christie’s surprising praise for President Obama’s handling of the relief effort reflected this.

We’re presented with an ideal opportunity, not only to replace broken infrastructure but to bring it up to date. New York Governor Andrew Cuomo has already kick-started a conversation about how New York — and every city in America, for that matter — needs to modernize its protections against the more frequent disasters that climate change will bring. Such improvements will cost money, but they will also create jobs.

Politicians’ hands will be forced — and that’s a good thing. Yes, more public spending will increase the already massive federal debt, but refusing help to the torn-up coastal regions of New Jersey, New York and Connecticut simply isn’t an option. With yields on Treasury notes close to record lows, now is the time to finance such investments in the future. In any case, none of this precludes Congress from negotiating a reduction in the country’s future Medicare and Social Security obligations.

Of course, much of the cost of rebuilding private property will fall to insurers and the private sector. But that too will drive growth and jobs. Money that’s been on the sidelines will be transferred to contractors, engineers and construction workers.

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Make no mistake: the next few months will be tough. Sixteen states accounting for about a third of the total U.S. economic output and population suffered an estimated $50 billion in combined damages. Countless storm-damaged small businesses will collapse; millions of consumers won’t have the will or wherewithal to shop for anything but necessities.

But here, too, there’s a silver lining. Who in Congress will wish to drive the economy over the so-called “fiscal cliff” now? In the midst of the critical holiday shopping period, few will want to tell traumatized New Yorkers, New Jerseyans and New Englanders that their payroll taxes are going up. Surely Sandy increases the chances of a bipartisan postponement to the $500 billion in spending cuts and tax hikes currently scheduled for Jan. 1.

All this is positive for the economy, and for the dollar. Once the reconstruction work translates into jobs, the Federal Reserve may have to consider winding down its “quantitative easing” program earlier than expected. With fewer dollars to be printed, a constant source of downward pressure on the greenback’s value would disappear.

Weighed against Europe’s intractable debt crisis and Japan’s deflationary trap, America’s robust rebound from this disaster will make its currency a buy.

(Michael Casey is managing editor for the Americas at DJ FX Trader, a foreign-exchange news service from Dow Jones Newswires and The Wall Street Journal. His new book on the global financial system, “The Unfair Trade,” was published in May. Write to Michael Casey at Michael.J.Casey@dowjones.com.)

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